Making sure your loved ones inherit the wealth you’ve left for them

Making decisions about how to pass wealth on after we’re gone is a necessary part of everyone’s financial planning at one stage in their life. If you’ve accumulated wealth over the years but are no longer in the best of health, ensuring your loved ones benefit from your estate and not the tax man can require some expert help. There are a number of ways an independent financial adviser can help you to pass on your wealth to your family, but to begin with, you need to employ a firm who offers you a good service.

If you have pre-existing health issues and are looking to make sure your family can inherit, ensure you look carefully for a firm with a good track record in this area. A firm who will address your needs with care and sensitivity when giving advice for inheritance. The easiest way of passing on your wealth is through your property. The tax man will allow you to gift a property to another person, tax free, as long as you then live for a further seven years from the date of the gift. The main proviso is that it must not be a property which you are using or intend to use as your residence. If you die during that seven year period, the property will be subject to inheritance tax just as it would have been if you had left it in your will. Therefore, the ‘seven year rule’ is only useful if you’ve got a strong likelihood of living for that period of time. If this is unlikely in your case there are other options you can choose from to safeguard the wealth you want to pass on.

Two useful investments available to you to prevent losing large sums to the tax man are the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs).
EIS allows an individual who purchases a maximum of thirty percent of a company to reduce their income tax liability by an amount equal to the percentage they have invested. The maximum that can be invested annually is £1 million, giving a maximum tax reduction in any one year of £300,000.

There are a lot of factors to consider when looking at an EIS. The government’s rules surrounding EIS are very exacting. You should have no connection to the company you seek to invest in in any way, neither should any of your family members. The EIS has to constitute a legitimate investment, the tax man is very suspicious of large cash purchases of shares in companies that don’t seem to stand any chance of making a profit. To prevent EIS from being misused by speculative investors, the government has stipulated that any investment in an EIS will have to be a minimum of three years in order to qualify for tax relief.

Any investment in an EIS carries with it risk, many fledgling companies that appear to have excellent prospects don’t succeed in the first three years of their existence, so it makes sense to spread the risk. A VCT is the best means of making your risks more manageable. That said, it is important to understand that neither EIS or VCT will be suitable for risk adverse investors.

The VCT is simply a vehicle for spreading risk across numerous different start ups. The trust will purchase shares in dozens of new companies, some of which will go to the wall, others which will hopefully become very successful.

There are two kinds of VCT shares you can buy, new shares directly from the trust and second hand ones that are already traded on the stock exchange.
If you buy second hand VCT shares on the FTSE you will be exempt from income tax on the dividends of ordinary shares and from capital gains on the sale of any shares.
Any new shares issued directly by the VCT that are not traded on the FTSE carry with them added benefits. The EIS rules apply, enabling your client to benefit from up to 30 percent income tax relief, capped at £1 million, with a maximum of £200,000 that can be invested tax free each year.

In order to benefit from a VCT you will need to keep the investment for five years.
These types of investments are often complex and require expert advice and guidance. If you want to find out if these investment options are right for you, then speak with your financial planner.